Economics for Startup Entrepreneurs
You have ideas for a startup? Economics is not just academic stuff that is useful for hedge funds, banks, and governments, it has very down-to-earth lessons to give you that you may want to keep in mind as you think about your startup. Here are the things to keep in mind…
Demand
You need some kind of demand. This seems obvious, but some aspiring entrepreneurs forget this! The demand can be direct willingness to pay for a good or service you will provide to a customer OR it can be indirect demand via advertising adds on your popular and free blog or website or building, in which case your popularity or visibility created a demand to get a piece of that visibility.
Demand means you are making life better for the people paying for what you supply. This can be anything, but it essentially boils down to one of these:
- Needs: standard goods or services that you can produce at a better production cost and sell at lower prices OR simply supply something better / different than existing competition.
- Money: help others make money via better returns on their financial or real estate investments or trading or whatever else; help others save money with coupons or other lower-cost access to goods or services in some way. The concept is simple: they pay x amount for your “whatever-yo-provide”, and they make x + something… the greater that “something” is, the better your chances of success, provided you are convincing enough to potential buyers.
- Time: help others save time in whatever way. Maybe you will shop for them, maybe you will provide cleaning services that will free up time for them to enjoy life, maybe you will make them spend less time in trafic jams. Whatever. Time and money are the 2 ultimate “hard constraints” in life.
- Problems: help solve known problems! The list is endless. Maybe it’s something annoying that gets on your nerves and you know it’s the same for many other people… solve it and make life better for others by also making money along the way :)
- Knowledge: knowledge and skills make life better in some way for some people, either simply due to better lifestyle setups and choices, health, the pleasure of learning (small niche but it does exist), OR via improved professional and financial outlooks for your clients. In the end, knowledge is a pretty major part of future success at anything, along with personal motivation and courage.
- Life: there are things that are not really related to anything about money or time or “standard” needs… Helping others improve their physical or emotional health, their overall happiness and well-being, improving at a given sport or art or science or whatever other discipline, improving at social skills or capacity to seduce the guy/girl; Dealing with anxiety or heartbreaks, etc. The list in this category is endless and the market potential is huge and still growing, believe it or not.
The type of niche market you find (the demand) will have characteristics. Study them: competition, prices, typical customer (age, income, lifestyle, preferences, etc.), geography, if applicable. Study the niche well. The niche market will guide you in terms of your typical approach: low volumes at high prices or high volumes at low prices?
Production
OK. So you found a demand with people who you believe would have a willingness to pay for what you can supply, and you believe you can supply a quality product that will indeed satisfy these people. Now you need to produce, or “supply” the market!
You need to think about your capacity to produce so that you can supply the market. This includes the need for equipment, machinery, YOUR TIME and effort, a physical place if needed, supplies, etc. You need to be able to supply consistently. This is extremely important, as any faltering supply can cause your niche market to vanish out of frustration or due to competition taking up what you were unable to supply!
Distribution and logistics
You have a niche with a demand that you studied well. You understand what is needed to produce for this market and you know what needs to be done. Good. Now you must think of distribution logistics and ALSO about your own suppliers and the logistics around your supplies that are needed for production. Do you need a truck? Will you spend hours every day fetching for supplies? How can this be improved? Can you distribute with Uber? Can you use standard mail? Do you distribute digital content? How will that content be distributed? This part can be significant and you really need to wrap your head around it before you move forward. Think of every aspect: traffic jams, roads, logistical issues, technological setups and potential problems, parking tickets and permits, etc.
Income potential
Based on a realistic assessment of the market and price, what would be a typical month of sales if things went relatively as planned? Do 3 scenarios that remain within realistic bounds: pessimistic, realistic, optimistic. Is there potential for scale effects, which means is there potential for significant growth in sales without a significant growth in costs (which we will get to shortly)?
The income potential is important, because if the market is limited and can’t grow or is extremely costly to grow, it is not a lucrative bet, even in the long run. You need to see at least some kind of potential for solid income in the long run.
Costs and credit
This is a big one! You need to think of all types of costs: fixed costs and “startup costs” such as machinery and equipment needed to produce and distribute, licenses and other regulatory costs, taxes, rent or mortgage payments, insurance, etc.
Then you have costs that can vary according to how much production you must accomplish: wages of employees or contractors that do some work for you, supplies required for your production, etc.
All these costs could pose problems if you have little access to credit or if you do not want to build up debt, which is totally understandable. You need to understand the cost structure of your production and distribution so that you build something that will eventually be profitable.
One cost that must not be underestimated is VISIBILITY! You can produce the best product in the world, but how will people know it exists? The cost of visibility can be almost zero if you have the right connections, but they can also be considerable if you need to “fight your way” to visibility, whether it is with adds on Internet or on walls or in magazines or simply with lots of time on your part. This is often a killer for many businesses, so be sure to get your visibility / marketing strategy right!
Note that your TIME is part of the costs, but at the start, you may find that your hourly wage is low — relax, if you have a good market and you work at it diligently and strategically by producing a quality product, you will eventually get more profit in your pocket per hour worked, and you will be your own boss, which is worth a fortune!
Note that you can declare the initial loss of the company over several years. Most countries allow to spread losses over several years, so be sure to ask your accountant about this, as it can help a lot. For example, suppose you start a small business that makes 15000$ the first year, but you spent 25000$ in total costs (be sure to put ALL possible costs in your income tax statement, from cell phone billas and electricity to part of your own mortgage or rent, etc — as your accountant!). With this setup, you can essentially decrease your taxable income this year and next by declaring the loss over 2 years. It varies per country, but the norm is that you can spread expenses and losses over 2 to 5 years. Note also that large costs on fixed capital such as buildings and machinery can be spread over much longer, of course.
More on visibility
Are you in a niche that would want some kind of assurance that you are supplying quality or credibility? It can be your experience and demonstrated accomplishments, but you may need other things, depending on your market. This is called a signalling problem.
For example, some people know a lot about health and nutrition and would probably be excellent “health advisors”, but they don’t have a “degree” to prove it — their competence comes from self-learning and doing… they have a signalling problem. They may know considerably more about HEALTH than medical doctors (who know a lot about sickness and prescription drugs), but they can’t really “prove it”, which presents a signalling problem. Signalling to the market bis important, so keep that in mind as you think about your startup.
Profit potential
Based on your evaluation of potential income and costs, and taking into account your time and your desire to start a business, is there good profit potential based on realistic expectations and on your desire to be your own boss and manage your life for yourself? If so and if you have the drive and energy to follow through, GO! Please click the heart to show appreciation for the insights. Be happy, healthy, and prosperous!
Pascal Bedard
pbedard@yourpersonaleconomist.com
